Tata Consultancy Services reported a challenging third quarter with net profit declining 14% year-on-year, though the company demonstrated resilience with continued revenue growth and strong dividend announcement. The results highlight the impact of significant one-time provisions while showcasing the company's progress in AI services and operational efficiency improvements.

Financial Performance Overview

The company's Q3FY26 financial performance presented a mixed picture with profit decline offset by steady revenue growth:

The profit after tax attributable to shareholders dropped significantly both on yearly and sequential basis, while revenue maintained positive momentum across both comparison periods.

One-Time Provisions Impact Results

The quarter included substantial one-off items that significantly impacted profitability. TCS recorded ₹21.30 billion in provisions for gratuity and leave encashments under the new labour code, ₹2.50 billion in restructuring costs, and ₹10 billion in legal provisions. Management indicated that the labour code changes will have a recurring impact of 10-20 basis points in future quarters.

Despite these provisions, the company maintained its EBIT margin at 25.2% sequentially, supported by 80 basis points of operational efficiencies and 20 basis points from currency gains. However, this was offset by 50 basis points impact from salary hikes implemented in September 2025 and another 50 basis points from higher selling, general and administrative expenses.

Dividend Declaration and AI Services Growth

TCS announced an attractive interim dividend package for shareholders:

CEO K Krithivasan highlighted the company's strong performance in AI services, which currently generate $1.8 billion in annualized revenue. He emphasized TCS's focus on becoming the world's largest AI-led technology services company through its five-pillar strategy, with Executive Director Aarthi Subramanian noting continued AI acceleration during the quarter.

Brokerage Recommendations and Outlook

Analyst opinions remained cautiously optimistic with varied target prices and ratings:

Goldman Sachs noted that the demand environment appears stable to improving, with BFSI vertical remaining strong and early signs of recovery in other verticals. However, the firm cautioned that overall growth is not yet broad-based and companies face limited visibility on the full extent of recovery in calendar year 2026.

Operational Efficiency and Future Guidance

TCS management expects to achieve its aspirational EBIT margin of 26-28% through strong revenue growth, with guidance for 25% EBIT margin in FY26-27 implying up to 20 basis points improvement year-on-year. The company continues to benefit from productivity gains and operational efficiencies while managing the impact of wage increases and higher investments in growth initiatives.

Morgan Stanley has reaffirmed its positive outlook on Tata Consultancy Services , maintaining its 'Overweight' rating with a price target of ₹3,540.00. The global investment bank's continued endorsement reflects sustained confidence in India's largest IT services company.

Analyst Rating Details

The investment firm's recommendation maintains its bullish stance on the technology major. An 'Overweight' rating typically suggests that analysts expect the stock to deliver superior returns compared to its benchmark index or sector peers over the investment horizon.

Market Implications

Morgan Stanley's maintained rating indicates the brokerage's confidence in TCS's ability to navigate current market conditions and capitalize on growth opportunities. The price target of ₹3,540.00 represents the analyst's assessment of the stock's fair value based on their evaluation methodology.

The 'Overweight' recommendation suggests that Morgan Stanley views TCS favorably within the broader IT services sector, expecting the company to potentially outperform its peers and deliver attractive returns to investors.